FTSE 100 drops as miners, AstraZeneca weigh

Shell swings to loss as value of inventories slumps

By

SimonKennedy

LONDON (MarketWatch) -- U.K. stocks retreated Thursday, led by a sell-off in mining and pharmaceutical shares after Xstrata unveiled plans to raise 4.1 billion pounds to pay down its debt and AstraZeneca reported disappointing earnings.

Xstrata (XTA) was the lead decliner for most of the day, down as much as 17%, but it recovered markedly in the afternoon. The shares closed up 3.6%.

The miner said existing investors will get the right to buy the new shares for 2.10 pounds each, or roughly a 66% discount to Wednesday's closing price. The group separately revealed a 35% drop in its net profit for 2008 to $3.6 billion, said it will cut its dividend, and announced a deal to buy coal-mining assets from Glencore International for $2 billion.

Citigroup analyst Heath Jansen said the rights issues still may not be big enough and the miner could have to renegotiate its debt covenants with bankers at the end of the year.

"The rights issue is probably as big as it could do in our view. The one benefit is that it has come to the market early," Jansen said.

He added the deal to buy coal assets from Glencore can be viewed as little more than a loan, as Glencore has the right to buy the assets back for $2.25 billion at any time.

Other mining stocks were also hit as commodity prices declined, with BHP Billiton (BLT)
BHP, -0.55%
and its former takeover target Rio Tinto (RIO)
RIO, -0.36%
both falling more than 3%.

Kazakhmys (KAZ) declined 3.4% after the copper miner said production is likely to fall 10% to 15% in 2009 due to the suspension of three higher-cost mines in the current weak market.

More broadly the main U.K. FTSE 100 index (UKX) fell 2.5%, or 105 points, to 4,190.11.

Other European markets finished lower Thursday and U.S. stock markets declined in early trading after heavy losses from Ford Motor Co.
F, +1.70%
among others See Europe Markets.

AstraZeneca, Royal Dutch Shell in focus

In earnings news, shares in drug company AstraZeneca (AZN)
AZN, +0.14%
dropped 6.3% after it reported a 1% dip in net profit to $1.25 billion and said it would lay off an additional 7,400 employees by 2013 as it expands its restructuring program. See full story.

And shares in rival GlaxoSmithKline (GSK)
GSK, -0.41%
declined 3.2%. The drugmaker said it will book a $400 million legal charge in its fourth-quarter accounts, casting uncertainty on its upcoming financial results.

Back to earnings news and oil major Royal Dutch Shell (RDSA)
RDS.A, -1.33%
announced that it swung to a $2.8 billion net loss in the fourth quarter as the slump in oil prices slashed the value of unsold inventories. See full story.

Adjusting for the impact on inventories, Shell said profit would have dropped 28% to $4.79 billion in the quarter, while production was largely flat. Adjusting for other one-off gains, the result was around $200 million below market expectations, though the stock still outperformed against its peers as Shell said it wants to maintain a competitive dividend policy.

The airline sector also had a rough session. Shares of British Airways Plc (BAY) declined 6.1% after UBS cut its rating on the carrier to neutral from buy, forecasting the airline will post an operating loss of 134 million pounds in 2010.

Shares of low-cost rival easyJet PLC (EZJ) slumped 8.1%.

Banks were back under pressure, with Barclays (BARC)
BCS, -1.25%
down around 6.3% and Lloyds Banking Group (LLOY)
LYG, -0.42%
dropping 11.8%.

Elsewhere in the financial sector, private-equity company 3i Group (III) dropped 16.4% amid reports the firm could be looking at a rights issue to raise capital. The fall extended Wednesday's losses when it announced the departure of its CEO and a sharp fall in the value of its biggest investments.

Data from Nationwide Building Society showed U.K. house prices dropped a further 1.3% in January as the deepening recession and financial turmoil continued to weigh on housing market sentiment.

Also in focus Thursday was insurer Legal & General (LGEN), which announced a 3% rise in 2008 new business sales to 1.49 billion pounds. The result was ahead of the consensus forecast, according to Dow Jones Newswires.

However, shares in the group declined 9.8% in London after it didn't give an update on its current capital surplus.

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